The offer by Russian President Vladimir Putin on December 1 to re-route Russia's stalled 63bn cubic metre a year (cm/y) South Stream gas pipeline through Turkey appears to have taken Ankara by complete surprise.

After Russian gas exporter Gazprom arbitrarily slashed the volume of gas it was sending through Turkey's western import line the week before, Turkish officials were warning of a major confrontation and possible gas shortages.

Instead, Putin offered to supply Turkey with 14bn cm/y of gas through the new line in place of the gas it currently receives via Ukraine, and to transit the almost 50bn cm/y remainder for export to Europe via a new gas hub to be developed on the Turkey-Greece border.

Russia's rationale is clear: it is committed to building a new line to bypass the troublesome Ukraine and having been refused permission to run South Stream across Bulgaria, it has turned to Turkey as an alternative route.

However, the projected pipeline would pose competition to Turkey's other ongoing gas transit projects: namely, the 31bn cm/y TANAP pipeline that Turkey is developing in partnership with Azerbaijan to carry Azeri gas to Europe, and construction of which is slated to begin next year, and Turkey's more nebulous plans to transit gas from the Kurdistan Region of Northern Iraq to Europe.

Tip top TANAP

Turkish Energy Minister Taner Yildiz confirmed December 2 that the only agreement inked with Moscow was one to "discuss" the possibility of developing a new form of the South Stream project.

He also confirmed that Turkey had no intention of doing anything to jeopardize TANAP or the development of Azerbaijan's Shah Deniz gasfield, which will supply that pipeline. "We are partners in Shah Deniz and TANAP – these are very important projects for both Turkey and the European Union," he said, referring to long-standing EU support for the development of a southern gas corridor through Turkey to compete with Russian gas.

However, Shah Deniz will supply only 16bn cm/y to the 31bn cm/y TANAP, and with no clear idea on where the remaining 15bn cm/y will be sourced from, questions have been raised over whether the pipeline can be operated profitably.

According to BP – the main shareholder and operator of Shah Deniz, which has agreed in principle to take a 12% stake in TANAP, along with Azerbaijan's Socar (58%) and Turkey's Botas (30%) – the unfilled capacity is not an issue. "The whole South Caucasus value chain can operate profitably using the 16bn cm/y from (the second phase of ) Shah Deniz II," a spokesperson for BP Turkey tells bne IntelliNews, confirming that the 16bn cm/y of Shah Deniz gas has already been sold, which guarantees the viability of both Shah Deniz and TANAP, as well as the planned Trans Adriatic Pipeline (TAP) which will carry the gas from the Turkey-Greece border to Italy.

Yet how the remaining 15bn cm/y of TANAP will be filled is still unclear. Both Socar and BP have signalled that they want to fill that capacity with gas from other Caspian fields, while Shah Deniz's newest shareholder, Malaysia's Petronas, is thought to be interested in supplying the line with gas from a field it is developing in Turkmenistan.

Development of all these fields will be costly, but with no requirement to meet the costs of developing TANAP, the gas from them should still be competitive with South Stream gas.

However, with European gas markets still seeing not seeing any surge in demand as the Eurozone economy continues to struggle, both will face stiff competition from cheaper options.

Kurdish questions, Turkish options

Foremost amongst possible cheaper options is gas from the Iraqi region of Kurdistan, where onshore development costs are considerably lower than offshore alternatives.

Kurdish Oil Minister Ashti Hawrami said in November that gas exports to Turkey were possible as soon as 2017, while Botas has confirmed that a planned 20bn cm/y capacity line linking existing transit infrastructure to the Iraqi border could be completed in less than a year, opening the prospect of transiting Kurdish gas to Europe.

And with ongoing talks between the Kurdistan Regional Government and the Iraqi central government in Baghdad going well, a deal between the two allowing for gas exports appears to be more a question of "when" rather than "if".

Already financially committed to TANAP and politically committed to transiting Kurdish gas – at least partly in hope of leveraging economic cooperation with the KRG into a permanent settlement with Turkey's own fractious Kurdish minority – the appearance of South Stream presents Ankara with a difficult choice.

Support all the gas transit projects and risk one or more failing as European gas prices fall through oversupply, or reject one and risk antagonising the backers.

The same question may have occurred to Russia.

With the bulk of the Turkish economy located in the northwest of the country, and relying on Russian gas for both heat and power, Ankara cannot have failed to notice the threat implicit in Gazprom's still-unexplained cuts to gas supplies.

Which in turn raises the questions of just how far Moscow is prepared to go in pressuring Ankara to facilitate this new version of South Stream. Too much pressure and Moscow risks both alienating potential gas buyers and forcing Turkey to turn to the already available alternatives.

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